Institutional Securities Corporation Comment On Regulatory Notice 22-17
Institutional Securities Corporation
N/A
October 3, 2022 Re: Regulatory Notice 22-17, Request for Comment on a Proposal to Shorten the Trade Reporting Timeframe for Transactions in Certain TRACE-Eligible Securities From 15 Minutes to One Minute Dear FINRA, In response to the proposed amendment to FINRA Rule 6730, we are respectfully providing comments as to why the amendment, which would change the reporting time from 15 minutes to one minute, in certain TRACE-eligible securities, is not a good idea, not practical, and will have adverse and discriminatory impacts to smaller sized firms and their customers. There are two adverse consequences that would arise from moving the reporting time to one minute from the time of trade: (1) small to mid-sized firms would be financially harmed and could cease their fixed-income trading business; and (2) retail customers will be harmed through higher costs and less efficient markets for TRACE-eligible fixed-income securities. The parties who would benefit from the proposed amendment are the large wire house firms and the vendors who provide automated reporting services and applications. Absent in the list of beneficiaries of the proposed rule amendment, is the retail customer. To the first point, while understanding that FINRA is acting in good faith with their attempt to significantly reduce the reporting time limit (a decrease of 93%) for TRACE-eligible securities, it is also clear that FINRA may not be aware of, or appreciate, how adversely this rule change will impact small and medium-sized broker-dealers and the basic dynamics of trading in fixed-income bonds. From the perspective of a small broker-dealer, we see this as a crippling regulation for small to mid-sized broker-dealers. Smaller sized firms generally use a manual order entry system for their TRACE-eligible securities transactions. Without having to purchase and use a third-party direct, automated system, it would be virtually impossible to accurately report all trades within the prescribed 60-second time period. Manual TRACE reporting must incorporate and account for multiple variables such as a firm receiving multiple orders at the same time or within close proximity to each other, and the differentiations of order entry patterns across several employees. Assuming that smaller-sized firms who use a manual reporting process only receive one order at a time, the 1-minute time period may appear feasible in theory, but in practice, this is not realistic; smaller sized firms will not always just receive one order at a time. The only practical way that reporting the executions in TRACE-eligible securities can be reduced from 15 minutes to 1 minute is if all trades completely by-pass human/manual entry and migrate 100% to electronic trading in these securities. This would disproportionately financially injure small and medium-sized firms who would be forced to invest an inordinate amount of capital to comply with the proposed rule. Larger firms can use automated entry and reporting systems, such as Bloomberg TOMS, but it’s so cost prohibitive for the smaller firms that it’s not fiscally possible for most firms to utilize. It is worth noting that the estimated cost to employ the Bloomberg TOMS application, to comply with the one-minute reporting timeframe, would be approximately $500,000. This in not a practical solution and could easily cause a lot of firms to cease their fixed-income business lines. In such an outcome, where is the best execution for clients if a great number of market-makers are forced out of the business due to this regulation? It appears as if the intentions of FINRA the MSRB, through their proposed rule amendments (6730 & G-14), is to make the fixed-income bond market look and feel more like the equity markets; however, the dynamics do not allow for this without creating/purchasing a mechanism or application that can automate all fixed-income trades, which would come at a prohibitive cost to small and medium-sized broker-dealers. Equities can trade thousands of shares in seconds, making the need for price transparency in an extremely short period of time a necessity. However, fixed income CUSIPS do not trade with the volume and frequency of equities. Therefore, unlike stocks, there is no material advantage gained by a customer by having a trade reported in 60 seconds versus 15 minutes. Some unintended consequences of this rule change may result in an elimination of this line of business at small to mid-size firms, a higher cost to the end retail investor, and a greater concentration of fixed-income bond trading at the largest firms in the industry. We do not believe this is the desired outcome of the FINRA and ultimately, not in the retail investor’s best interest. Sincerely, Scott Hayes, President and CEO Chris Neidlinger, CCO Institutional Securities Corporation
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Institutional Securities Corporation Comment On Regulatory Notice 22-17
October 3, 2022 Re: Regulatory Notice 22-17, Request for Comment on a Proposal to Shorten the Trade Reporting Timeframe for Transactions in Certain TRACE-Eligible Securities From 15 Minutes to One Minute Dear FINRA, In response to the proposed amendment to FINRA Rule 6730, we are respectfully providing comments as to why the amendment, which would change the reporting time from 15 minutes to one minute, in certain TRACE-eligible securities, is not a good idea, not practical, and will have adverse and discriminatory impacts to smaller sized firms and their customers. There are two adverse consequences that would arise from moving the reporting time to one minute from the time of trade: (1) small to mid-sized firms would be financially harmed and could cease their fixed-income trading business; and (2) retail customers will be harmed through higher costs and less efficient markets for TRACE-eligible fixed-income securities. The parties who would benefit from the proposed amendment are the large wire house firms and the vendors who provide automated reporting services and applications. Absent in the list of beneficiaries of the proposed rule amendment, is the retail customer. To the first point, while understanding that FINRA is acting in good faith with their attempt to significantly reduce the reporting time limit (a decrease of 93%) for TRACE-eligible securities, it is also clear that FINRA may not be aware of, or appreciate, how adversely this rule change will impact small and medium-sized broker-dealers and the basic dynamics of trading in fixed-income bonds. From the perspective of a small broker-dealer, we see this as a crippling regulation for small to mid-sized broker-dealers. Smaller sized firms generally use a manual order entry system for their TRACE-eligible securities transactions. Without having to purchase and use a third-party direct, automated system, it would be virtually impossible to accurately report all trades within the prescribed 60-second time period. Manual TRACE reporting must incorporate and account for multiple variables such as a firm receiving multiple orders at the same time or within close proximity to each other, and the differentiations of order entry patterns across several employees. Assuming that smaller-sized firms who use a manual reporting process only receive one order at a time, the 1-minute time period may appear feasible in theory, but in practice, this is not realistic; smaller sized firms will not always just receive one order at a time. The only practical way that reporting the executions in TRACE-eligible securities can be reduced from 15 minutes to 1 minute is if all trades completely by-pass human/manual entry and migrate 100% to electronic trading in these securities. This would disproportionately financially injure small and medium-sized firms who would be forced to invest an inordinate amount of capital to comply with the proposed rule. Larger firms can use automated entry and reporting systems, such as Bloomberg TOMS, but it’s so cost prohibitive for the smaller firms that it’s not fiscally possible for most firms to utilize. It is worth noting that the estimated cost to employ the Bloomberg TOMS application, to comply with the one-minute reporting timeframe, would be approximately $500,000. This in not a practical solution and could easily cause a lot of firms to cease their fixed-income business lines. In such an outcome, where is the best execution for clients if a great number of market-makers are forced out of the business due to this regulation? It appears as if the intentions of FINRA the MSRB, through their proposed rule amendments (6730 & G-14), is to make the fixed-income bond market look and feel more like the equity markets; however, the dynamics do not allow for this without creating/purchasing a mechanism or application that can automate all fixed-income trades, which would come at a prohibitive cost to small and medium-sized broker-dealers. Equities can trade thousands of shares in seconds, making the need for price transparency in an extremely short period of time a necessity. However, fixed income CUSIPS do not trade with the volume and frequency of equities. Therefore, unlike stocks, there is no material advantage gained by a customer by having a trade reported in 60 seconds versus 15 minutes. Some unintended consequences of this rule change may result in an elimination of this line of business at small to mid-size firms, a higher cost to the end retail investor, and a greater concentration of fixed-income bond trading at the largest firms in the industry. We do not believe this is the desired outcome of the FINRA and ultimately, not in the retail investor’s best interest. Sincerely, Scott Hayes, President and CEO Chris Neidlinger, CCO Institutional Securities Corporation